Funds’ changing scene

Greece’s mutual fund industry is bound to undergo a major transformation in the next couple of years as new types of funds are allowed to flourish and mutual fund companies are given the right to manage the money of institutional and private investors. This comes at a time when the first signs of consolidation in the domestic fund industry are visible and local investors continue to slowly but steadily search for investment opportunities in foreign markets. Faced with the new reality, funds domiciled in Greece have no choice but to adjust as more consolidation appears to be in the offing. After years of foot-dragging, it looks as if the time has come for Greece to make two European Union directives concerning the mutual funds part of Greek law. Once directives 107 and 108 of 2001 become Greek law, new funds are expected to emerge such as the Fund of Funds (FoF), investing their assets in mutual funds instead of stocks and bonds, Exchange Tradeable Funds (ETFs), whose shares are traded in bourses, and Index Funds, tracking a specified benchmark stock or bond index. Although theoretically speaking some index funds are offered today, in reality these are quasi-index funds at best. In addition, the two directives will give funds the right to manage private investors’ money as well as pension fund assets, rendering some companies (EPEY) offering financial services obsolete. This development is likely to give a boost to the local mutual fund industry, whose total assets under management have risen by 1.2 percent to 30.8 billion euros year-to-May 31 and comes at a time when the first signs of consolidation are evident. EFG Eurobank announced last week it had reached an agreement with Dutch-based Eureko and local Nova Bank to acquire the mutual funds of Intertrust, the country’s fifth-largest Mutual Fund Management Company (AEDAK), pending the approval of the proper authorities. There is also increased speculation in the market that Societe Generale is seeking to sell the mutual funds of its Greek listed subsidiary, General Bank, while other smaller companies are reportedly trying to figure out what to do next. Small market Undoubtedly, Greece’s investment fund market is still very small compared to other European markets, with total assets accounting for just 0.6 percent of the total European industry at the end of the first quarter. It has the same market share as Portugal, but it is much smaller than Ireland’s 8.0 percent or Luxembourg’s 20.5 percent, although lower taxes and looser regulations explain the difference. Unlike Portugal, Spain and Belgium, which saw their residents develop a clear liking for mutual funds investing in euro-denominated securities after their entry into the eurozone, Greek investors did not follow the same pattern. The different timing, namely the stock market bubble and the pain it inflicted, may have had something to do with this. Still, brokers, bankers and fund managers appear to share the belief that the trend is toward more international investing. Although direct investments into foreign equities appear to be growing less slowly than a couple of years ago, recent figures from the Association of Greek Institutional Investors show that local investors continue to pour more money into domestically domiciled mutual funds investing in foreign securities. Net inflows into mutual funds investing mainly in foreign equities reached 180 million euros in the first five months of the year; during the same period, net outflows from domestic stock funds amounted to 79.5 million. In the 12 months to end-May, net inflows into stock funds investing at least 65 percent of their assets under management abroad exceeded 445 million euros versus 31.7 million of inflows into domestic stock funds. A similar picture emerges from bond funds, balanced funds and money market funds. Greeks bought some 442 million euros’ worth of bond funds, mostly assets in foreign fixed-income instruments in the last 12 months or so, and liquidated shares of domestic bond funds worth 40.1 million during the same period. The latter figure masks large liquidations of shares in the order of 183 million euros in the first five months of this year alone. Local investors also bought shares in balanced funds, investing a great deal of their assets in foreign equities and bonds, worth 80 million euros in the last 12 months to end-May, of which 74 million were in the January-May 2004 period, versus net outflows of 332.5 million euros in domestic balanced funds since the beginning of June 2003 and 136.6 million in the last five months. With Greeks facing euro interest rates at historically low levels, it is no surprise that net inflows into money market funds investing mainly abroad was a mere 2.9 million euros in the January-May 2004 period and 81.9 million in the last 12 months versus net outflows of 31.5 million euros in domestic money market funds in the first five months of 2004 and sizable net inflows of 428.7 million in the last 12 months. Eager to keep their clients happy, mutual fund management companies belonging to large banks have tried to increase the menu of options offered to their shareholders, either by launching their own funds or selling shares in funds investing abroad and administered by foreign asset managers. The latter is facilitated if the parent bank is foreign-owned, such as Societe Generale. There should be no doubt that the pan-European trend of financial supermarkets, where a client has the choice of many funds managed by many different asset managers, will come to Greece sooner or later. Already some banks are hesitantly entering into agreements with well-known foreign banks to sell the latters’ funds through their own distribution network in Greece. Of course, the appeal of these funds is partly compromised for the time being because of the 20 percent withholding tax on capital gains upon repatriation. Still, having a motivated and educated sales force along with the appropriate infrastructure to sell funds is a necessity. The Greek mutual fund industry is headed for a fundamental shakeout whose repercussions will be felt in related industries, such as banking, for some time to come. Grasping the new opportunities by adopting the proper strategies may prove more essential for banks and funds in a few years’ time than it appears at present.